Analysis | Big Questions

Belt & Road is Back on the Rails in Eastern Europe

Since the announcement of Chinese president Xi Jinping’s Belt and Road Initiative (BRI) in 2013, China’s High-Speed Rail ambitions have stretched from Southeast Asia to Europe and beyond. To many observers, these projects are indicative of China’s increasing presence on the international stage and its mounting clout in areas previously dominated by other powers. This is particularly true in Central and Eastern European (CEE) states, where Chinese trade and investment have been steadily increasing since the 2012 advent of its “16+1” format. This unique configuration brings together 11 EU-members and 5 Baltic states to promote trade and cooperation.

As observers raise questions about China’s growing role in the region, an important case to watch is the Belgrade-Budapest High-Speed railway. It is a Chinese-funded rail project that intends to connect Hungary, an EU member, to Serbia, an EU-candidate country that has yet to accede to full member status. The railway is one of the few Chinese-funded projects to get off the ground in an EU-member state, and its progression demonstrates both some of the hurdles China’s BRI is likely to face in the European context, as well as how China is likely to react to them. Given the emphasis on transparent, competitive, and open project standards enshrined in EU law, the project could serve as a bellwether for what to expect in the future when China is pressured to adhere to western standards.

The second was an announcement by Hungarian foreign minister Péter Szijjártó that public tenders would open for the Hungarian section of the line. The announcement was significant considering the line had effectively been stalled since September 2016. Progress was abruptly halted when news surfaced that the European Commission was preparing to launch infringement proceedings against the project for failure to uphold EU laws regulating transparency and public procurement processes. Among the accusations were claims that the construction contract for the $2.1 billion project was directly awarded to a state-owned Chinese rail company, China Railway International Corporation, without first opening the project up to public tenders – a step required by EU law for public works projects exceeding €5.2 million.

In February 2017, the European Union’s delegation to China released an official statement to clarify the issue. The delegation maintained that the EU “had not formulated any views regarding the project nor taken any position on the matter.” Rather, the press release indicated that the EU had initiated a routine dialogue with Hungarian authorities to clarify the project’s compliance. Following the press release, in April 2017, the joint venture (JV) created by the state-owned Hungarian railway company and China Railway International Corporation, Kínai-Magyar Vasúti Nonprofit, released a statement stating that the JV could not carry out construction tasks and that the procurement policy for the project would be EU-compliant in all respects. According to the JV, its role is to prepare and conduct tenders, conclude contracts, monitor project activities, and fulfill project management.

This series of events illustrates China’s willingness to compromise and adapt. Rather than push ahead with plans to use a Chinese contractor and risk facing infringement proceedings, China and Hungary quietly opted to settle for a public tender, demonstrating that China may not be immune to outside pressure. As Xi Jinping’s signature foreign policy initiative, recently enshrined at the Nineteenth Party Congress, the BRI could suffer if high-profile examples emerge that undercut its claims of being open and inclusive.

However, that adaptability also suggests that all BRI projects may not be created equal. While China was willing to adhere to European procurement rules in the context of Hungary, it does not necessarily mean that China will do so across the full geographic scope of the initiative, which currently encompasses 70 countries across 4 continents. For example, in the Western Balkans, where countries are not required to uphold the same transparency standards for procurement as EU members, a number of Chinese-financed projects have been directly awarded to Chinese state-owned enterprises. Such actions reflect the same behavior that sparked the EU inquiry into the Belgrade-Budapest line. These inconsistencies show that broad generalizations about “Belt and Road projects,” whether positive or negative, are not particularly helpful and could even be dangerous when formulating policy. A more successful approach is likely to involve nuanced and localized policies in the same way that China has adopted localized approaches to infrastructure investment under the BRI umbrella.

Looking forward, one looming question that remains for the project is who will win the public tender. Should the bid go to a Chinese company, Hungary and China could face claims that the process was skewed, regardless of the merit of such accusation. After all, Chinese rail competition in Europe’s backyard has hardly gone unnoticed. The proposed merger of two leading European rail manufacturers, Siemens of Germany and Alstom of France, stands as stark evidence that European rail companies intend to remain competitive in the face of China’s rising influence. Like the rest of BRI, this story is still developing.

Maesea McCalpin is a Research Associate and Program Manager for the CSIS Reconnecting Asia Project.